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Warning: There is a lot of fiscal space in this article.

LONG BEFORE THE election started it was said that the campaign would be fought on the economy.

If the first two days are anything to go by then that is absolutely true.

Yesterday, Enda Kenny committed a faux pas of sorts when he tried to dismiss questions about the dreaded fiscal space by saying he didn’t want to get into “economic jargon”.

But under pressure, and clearly unable to explain the detail, Kenny handed over his able Finance Minister Michael Noonan to explain the detail, with the promise of more today in the party’s much-vaunted long term economic plan.

Unsurprisingly, the opposition were not impressed:

Since taoiseach can't explain fiscal space maybe buzz lightyear should be interviewed instead failing that we could try sheriff woody

So, this morning, in a dark and cramped basement in Dublin’s CHQ building – Fine Gael’s questionable choice for its media HQ during the election – the party launched its long term economic plan – or LTEP for short.

In simple terms, the fiscal space is the amount of money that will be be available to the next government over and above what it is already spending on public services like health, welfare, education and so on. More on that here.

Is all this money guaranteed?

No. This money will only become available if the economy continues to grow at a rate of around 3% annually over the next five years. This is why Fine Gael constantly talks about the need to “keep the recovery going”.

But, in reality, the fiscal space does not actually exist or, as one Fine Gael source put it yesterday:

There isn’t a single euro of fiscal space right here, right now.

The spending outlined by Fine Gael today is based on what smart people working in the Department of Finance reckon might happen in the economy over the next five years. As Noonan said today:

The plans are based on forecasts and forecasts are based on assumptions.

But remember when economists forecast a soft landing prior to the great crash of 2008? Proceed with caution.

This is where things get really interesting if you’re a nerd, mildly interesting if you’re a casual observer, and even more boring if you couldn’t care less.

Fine Gael claims that the fiscal space is €10.1 billion. But Fianna Fáil and Sinn Féin both reckon the fiscal space is much lower, in the region of around €8 billion – €9 billion, depending on which one you ask.

But the government’s own budget watchdog, the Irish Fiscal Advisory Council (IFAC), says the fiscal space is just €3.2 billion.

That’s not all. As recently as last week Fine Gael was floating a fiscal space figure of €12 billion which Labour is also putting about. The junior coalition party has yet to publish its economic plans, so watch this space.

Fine Gael cites Department of Finance estimates which say that €8.6 billion will become available with an increase in economic growth over the next five years.

In addition, the relaxation of EU fiscal rules – because Ireland’s economy has performed so strongly over the last five years – will mean an extra €1.5 billion becomes available in 2018.

Add it up and you’ve got your €10.1 billion.

Why does IFAC say it’s only €3.2 billion?

IFAC has factored in inflation – the rising cost of goods and services – over the next five years into its numbers. Noonan said today:

The Fiscal Council is basing its figure on building in inflation…. they’re building in figures to do what no government has done in this country: to allow up-front increases in bands and credits in income tax with inflation.

Source: Sam Boal

IFAC, Fine Gael says, is assuming that tax bands and rates will move in order to compensate taxpayers for rising inflation over the coming years.

It’s also assuming that there will be a 2% increase in public sector pay after 2018 and increases in welfare payments in line with inflation. No government has ever automatically linked such increases to inflation.

Noonan argued that separate measures, taken on Budget day, will compensate for inflationary pressures on consumers. The Department of Finance does not factor in these costs because ultimately it’s the decision of the next government as to whether tax bands and welfare payments should move in line with inflation. Noonan added:

I am not saying the Fiscal Council is wrong, I’m just saying they have a different way of estimating it.

Is Fine Gael really going to abolish USC?

So it says. The party says abolition of Universal Social Charge forms part of plans to make work pay – the idea that someone is always better off in a job than on the dole. Without doing anything else, it will cost €3.7 billion to do it over a five year basis.

However, the party argues that it will clawback €607 million from high earners, particularly those earning over €100,000. There will also be increased excise duty on cigarettes, which will bring in €349 million and improvements in tax compliance measures, which will bring in €250 million:

Because of this and other measures outlined in the chart above, Fine Gael claims that overall it will cost just €2.5 billion to abolish USC. The party says it will publish a detailed tax plan in the next couple of days.

What about this ‘rainy day fund’?

Fine Gael is pledging that a quarter of the fiscal space will be used for a contingency and stability reserve or a ‘rainy day fund’. This €2.5 billion will be set aside over five years to account for any external events or shocks that impact on the Irish economy.

If there is a crisis that hits Ireland the money will be deployed to capital programmes to maintain employment and keep up demand in the economy.

But it’s worth noting that the National Pension Reserve Fund was nearly 10 times the size of this proposed fund was gobbled up pretty quickly by Ireland’s financial crisis in 2008. In other words, €2.5 billion over five years isn’t a huge amount of money in the grand scheme of things.

I’m still a bit confused by all of this…

Don’t worry, you’re not the only one. All you really need to remember is that this fiscal space doesn’t exist. Not a single euro of it. As Michael Noonan said, it’s all based on forecasts which are based on assumptions.

There are an awful lot of ‘ifs’, ‘buts’ and ‘maybes’ that make it impossible to be certain that the billions and billions Fine Gael and co are talking about spending will actually be available to them or whichever parties form the next government.

Ultimately, the choice for you the voter will be which party do you trust on the economy. Fine Gael’s put forward part of its plan, the other parties will follow suit in the coming weeks.

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